Some of the benefits of forming a corporation include liability protection and the separation of corporate debt from the personal assets of its owners. This is true in most cases; however, exceptions exist when the corporation accrues back taxes and dissolves while the balances are still owed. Many corporate taxes are discharged or noncollectable when a corporation shuts down, but corporate officers may have to personally pay a portion of the corporate tax balance.
Federal Back Taxes
Federal back taxes your corporation may owe include payroll and corporate income tax. In addition, depending on the type of business you operate, you may have excise taxes, such as heavy highway use tax. When you dissolve a corporation, most federal tax balances become noncollectable with the exception of a portion of payroll tax, which means the majority of federal tax balances may remain dormant, and the IRS may not seek collection. However, if you reopen your business under the same Employer Identification Number (EIN), the IRS may seek collection of unpaid taxes at a later date.
State Back Taxes
If you owe state back taxes, corporate dissolution does not always resolve the balances you owe. In many cases corporate officers may be personally responsible for paying the taxes because state taxes are often collected from third parties who expect your company to remit the tax to the state. The most common issues arise from sales tax and state income tax collections. You collect these taxes from your customers and employees. In most cases, even in the event of corporate dissolution, these taxes must still be paid to the state. Some state taxes, such as corporate income tax, are not collected from third parties. When your company dissolves, taxes in this category may be discharged. Each state has different taxation rules, so consult with a local attorney to discuss state tax balances prior to dissolution.
Trust Fund Recovery Penalty
If your corporation owes federal payroll taxes, corporate officers may be personally assessed with a portion of the balance when the corporation shuts down. Personal assessments are recorded under Social Security Numbers, which is called the Trust Fund Recovery Penalty and includes the amount withheld from employees for federal income, Social Security and Medicare tax. It does not include any corporate Social Security or Medicare matching. The IRS interviews the officers of the corporation to determine who is personally responsible for paying the trust fund. In most cases, the responsibility belongs to the person who authorized payroll tax deposits, signed quarterly returns (Form 941) and signed pay checks. The IRS may find more than one person responsible, but the total amount is still assessed to each person. You may request a payment plan to pay the balance in installments.
You must take several steps to properly dissolve your corporation. You must first liquidate all corporate assets, which includes items such as accounts receivable, furniture, office equipment and inventory. In general, the value of your assets must be offered to your creditors before you shut down. If liens have been filed against your company, you should pay the debt of the priority lien holder first, which is the company or entity that first filed a lien against the business. After you dispose of your assets, you must file Articles of Dissolution with the state the corporation is registered in and file final tax returns with the state and IRS. Failure to file final tax returns may result in future substitute assessments. A substitute assessment occurs when the IRS or state uses information from a prior return to create a new return for the corporation, which creates additional balances for the business. Although substitute assessments may be adjusted by filing zero balance returns, it is an avoidable process.